Following the implementation of IFRS 17, the financial regulators introduced the surrender value reserve system in December 2022. This system requires insurers to allocate any shortfall between their market-valued insurance liability and the surrender value as a reserve within retained earnings. However, since the introduction of the system, the substantial increase in the accumulated surrender value reserves has constrained dividend distributions to shareholders and resulted in underpayment of corporate income taxes. To address these issues, after discussion with the tax authorities, the financial regulators devised a plan to improve the surrender value reserve system. On October 28, 2024, they announced a proposed amendment to the Insurance Business Supervisory Regulations (the “Proposed Amendment”) to detail the improvements to the system.
Under the Proposed Amendment, insurers whose K-ICS ratio meets a certain threshold[1] at the end of the preceding quarter will be required to reserve only 80% of the current surrender value shortfall as a surrender value reserve.
For insurers with a strong capital structure, the Proposed Amendment is expected to increase the profits available for dividends, although it may also lead to a higher corporate income tax burden.
Stakeholders are invited to submit comments on the Proposed Amendment until November 18, 2024. If passed, the Proposed Amendment will enter into force beginning with the FY2024 settlement.
[1] This threshold will be set at 200% as of the end of FY2024, decreasing to 190% at the end of FY2025, 180% at the end of FY2026, 170% at the end of FY2027, 160% at the end of FY2028, and 150% at the end of FY2029.
